While many projects in web3 aspire to become the “Disney of web3”, it’s evident that Hollywood is navigating turbulent waters. Surprisingly, these emerging startups might possess a competitive advantage in creating the next generation of media empires.

This is the initial thread of a series that delves into the challenges currently besieging entertainment giants and the opportunity for groundbreaking web3 media companies such as Claynosaurz and Nada of the Sun to reinvent the entertainment paradigm.

First, allow me to introduce myself: I am @m3taversal, a private equity investor immersed in the world of media and entertainment. Over the past two years, my journey has led me to invest in, operate, and converse with both traditional production houses and avant-garde web3 teams like Claynosaurz and Nada of the Sun.

Currently, legacy entertainment powerhouses are grappling with plummeting revenues, escalating costs, archaic business strategies, and a widening chasm between creative leaders and their audience base.

Declining Revenues

Traditional entertainment companies are facing severe headwinds. In an attempt to counter the decline of linear TV channels, juggernauts like Disney, Warner Bros., and Paramount poured billions into developing their streaming platforms. Simultaneously, they engaged in a costly race to amass content.

The influx of new platforms has dramatically escalated competition, leading to increased subscriber churn. As viewers shift between platforms seeking fresh content, it's altered the core economics of streaming. Attaining profitability has become more challenging than ever.

Source: Doug Shapiro

Peak revenue years for the entertainment sector seem to be in the rearview mirror. Simplified, $15 streaming subscriptions cannot match the profitability of $80 PayTV packages. This structural shift implies an impending phase of revenue decline as higher-profit PayTV users gradually fade, replaced by more volatile streaming subscribers

Increasing Costs

Entertainment costs are soaring, juxtaposed against shrinking revenues. Streaming platforms are under immense pressure to secure platform-defining franchises like "Stranger Things" for Netflix, "The Mandalorian" for Disney+, "Game of Thrones" for HBO, and "Ted Lasso" for Apple TV+. These blockbuster attractions are imperative to drive subscription numbers and retain viewer loyalty.

This has resulted in a massive increase in budgets for premium TV shows and movies.

source: Stacker.com

Historically, the entertainment industry's pay structures ensured that key talents, whether they be directors, writers, or actors, received an upfront fee complemented by backend profit participation. This system allowed the likes of Steven Spielberg, Larry David, and George Lucas to amass significant wealth and establish their own influential studios or production entities.

However, the introduction of original content by Netflix in 2010 marked a pivotal shift. Preferring the cost-plus model, Netflix began offering talent a sizable fixed fee while forgoing the traditional backend participation. The rationale? To have outright ownership of the content and maintain proprietary viewership data. As industry leaders often do, Netflix set a trend, and other streaming platforms quickly embraced this approach, leading to an explosion of cost-plus deals during the ensuing Streaming Wars.

This transition carries with it several consequences:

1. Skyrocketing Costs: The absence of backend participation means that high-profile talent now demands heftier upfront payments, driving production costs to new heights.

2. Decreasing Quality: The changed incentive structure means creatives compensation is fixed regardless of the quality of their work. This demotivates key creative talent from investing extra time and effort into refining and perfecting their projects.

3. A Shift in Creative Power Dynamics: Once creators and visionaries with ownership stakes in their works, many talents now find themselves in roles more reminiscent of contracted employees rather than empowered stakeholders.

As streaming continues to dominate the entertainment landscape, these shifts will undoubtedly have profound implications for the future of media and how we consume it.

Ongoing Strikes

Relations in Hollywood are extremely fractious at the moment. Both the Writer’s and the Actor’s Guilds are simultaneously striking for the first time since 1960.

The strike has been going on for months with no end in sight.

While both parties have engaged in extensive negotiations, significant disagreements remain on foundational issues. Central to these disagreements are matters of backend profit participation, minimum staffing and the evolving role of generative AI in entertainment. The implications of these sustained strikes are far-reaching. If they continue, we can anticipate a significant content drought towards the end of 2024 and well into 2025.

Furthermore, the strike's resolution may force major studios to make concessions on staffing and AI usage. This could hamper their innovative edge, allowing nimble competitors to capitalize on emerging technologies and reshape the entertainment landscape.

Over-Extension of Iconic Franchises

In recent years, major entertainment entities have increasingly leaned on their cornerstone franchises in an effort to entice new subscribers and amplify profits.

However, this strategy has culminated in an evident dilution of content quality, subsequently eroding the brand equity of these entertainment behemoths. Since 2021, Disney has rolled out 8 Marvel TV series and 9 films, alongside a significant surge in Star Wars content. Regrettably, the accelerated production timelines have adversely impacted the quality of many of these offerings.

Similarly, Warner Bros. has faced challenges, witnessing missteps with properties like Shazam, the Flash, and Blue Beetle.

This trend isn't exclusive to just a few studios; the industry at large seems to be producing an overwhelming volume of lackluster content, which goes largely unnoticed by the target audience.

Moreover, anticipated blockbusters such as Mission Impossible, the latest Indiana Jones, and Transformers did not meet industry expectations. A possible offshoot of this overproduction is the evident "superhero fatigue." The once-thriving genre is seeing diminishing audience enthusiasm, with fewer fans showing interest in the latest superhero releases.

Opportunities in Disruption: A New Dawn for Web3 Pioneers

The entertainment sector is undergoing a profound transformation. Legacy giants are grappling not only with the rising tide of user-generated content on platforms like TikTok and YouTube but also with the potential disruption brought about by generative AI, which could significantly alter the cost and production paradigms.

Moreover, amidst pressing market demands and escalating debt burdens, many of these established entities are taking a step back from uncharted territories such as web3 and the metaverse. Focusing instead on optimizing their existing operations and stemming the bleeding.

This creates opportunity. Hollywood is not doing the groundwork necessary to create the next generation of breakthrough media franchises.

In this new era for entertainment, where the lines between entertainment and social media blur, the emphasis on nurturing a loyal fanbase and establishing direct fan relationships has never been more critical. Coincidentally, this is web3’s core value proposition.

For nimble, pioneering web3 entertainment ventures, the turmoil in Hollywood presents a golden chance. They stand on the cusp of revolutionizing the entertainment industry, potentially overshadowing their legacy counterparts.

Source: Midjourney